Purchasing and Supply Management Essay

Purchasing and Supply Management

Introduction

Why is purchasing and supply management so important to a firm’s success? Burt (2010) perhaps puts it best: “Historically, supply management has been considered important because of its impact on costs” (p. 9). In other words, a firm seeking to be competitive and profitable must have a good purchasing and supply management process in place—otherwise it risks watching its bottom line whittle away due to costs that it did not try its hardest to reduce. This paper will discuss the importance and value of purchasing and supply management by 1) looking at how the function relates to selecting a qualified supplier, 2) selecting the best strategies for negotiating prices, 3) creating a project supply, service and material budget for detailed requirements, 4) discussing the benefits and costs of outsourcing, and 5) evaluating various organizations that are benchmarks in purchasing and supply management and identifying their best practices in the industry.

Importance of Purchasing and Supply Management

Suppliers needs purchasers and purchasers need suppliers—it is a symbiotic relationship that both should benefit from. However, because every company seeks to make a profit and increase its bottom line whenever it can, the relationship between supplier and purchaser can become strained and can even lead to impasses that prevent one or the other from being successful in business. This especially happens when a company is running low and cash, as was recently the case with Tesla, which asked suppliers for cash back in order to keep its own operations funded. This is something no supplier wants to hear, particularly when it is owed a great deal of money. In the business of purchasing and supply management, relationships are crucial and purchasing and supply management professionals must make every attempt to create a relationship in which both the purchaser and the supplier succeed.

The five most important goals for purchasing and supply management professional are: 1) to lower costs for the company by purchasing supplies at the lowest price possible from a reliable supplier; 2) to manage relations well so that the firm and its supplier can engage in meaningful and mutually beneficial business; 3) to improve quality for the firm; 4) to promote the pursuit of innovation; 5) to leverage new technology whenever possible; and 6) to reduce risk and to ensure the supplies will be there when needed (BDC, 2019). By pursuing these goals the purchasing and supply management professional can help the company keep operations going—though of course the company will also depend upon numerous other departments as well. So at the end of the day the supply manager will not make the company—but if he does not perform well he can certainly break the company.

How This Relates to Selecting a Qualified Supplier

Selecting a qualified supplier is the essence of the job in many ways. Though the purchasing and supply management professional will aim to get the best prices possible, it will sometimes be the case that the best price does not come from the most reputable supplier. Should the manager sacrifice quality and reliability for price? Never—doing so would present enormous risks: for instance, what if a much needed supply for the production line is needed and has not come in because the supplier failed to ship? The manager may have thought he was getting a great price and a deal by contracting with the cheapest supplier, but now he realizes his mistake: he is holding up the production line and the company is now losing money. In his attempt to save the company money by going with the cheapest supplier, he ended up costing the company a lot more money because production came to a halt. Had the manager selected a higher quality supplier, production would still be going strong. Thus, as in all things, quality typically costs more, and that is something a purchasing and supply manager must take into consideration when selecting a qualified supplier.

How to Select Strategies for Negotiating Prices

Negotiation typically involves how much an item will cost to ship and deliver: the supplier is going to want to cover his costs and make a profit, and the purchasing and supply manager is going to want to keep his costs down so as to allow his company to make a profit after production. The two will be able to negotiate price by focusing on other aspects of the deal—such as delivery time, schedule or frequency; payment terms; warranties and a merchandise return policy; and the ease of reordering or signing a long term contract based on performance (NC State University, 2003).

By asking competing suppliers for favorable terms, one can obtain a suitable offer to counter a supplier with and thus achieve a better outcome for one’s firm. This is what is known as obtaining the competitive advantage (Monczka & Handfield, 2016). The competitive advantage strategy for negotiating prices is one of the best when there are multiple suppliers that can supply the firm with what it needs. In a market where suppliers are few and thus have the advantage, competitive advantage is not going to be the best strategy to use. In any event, the aim should be to identify one’s bottom line and then to ask for more than one might expect to get. Starting high gives you room to walk down.

Creating a Project Supply, Service and Material Budget from Detailed Requirements

The first step in this process is to identify the needs—i.e., the requirements for supply, service and materials. This tells you what you…

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…shows that risk can be divided into categories based on assessment, mitigation, monitoring, and contingency planning. From there the tool for managing risk is basically just as Harland et al. (2003) described their own.

This shows that Harland et al. (2003) provide a lesson in managing supply network risk that corroborates what Benton (2013) provides in his book. Looking at loss, risk management, and so on all help to provide a better view of how the supply chain can be hampered and how a company should be prepared to address the issues when it does occur. Benton (2013) provides a great deal more material for consideration, such as the role that lean manufacturing can play in the supply chain by developing a business strategy of “doing more with less” (p. xvii). However, the supply chain focused manufacturing planning model that Benton (2013) gives is fundamentally in line with the risk management tool given by Harland et al., (2003). Benton (2013) examines the cost, quality, delivery, safety and morale as drivers of lean manufacturing. The issue that Harland et al. (2003) fail to focus on is morale.

What this indicates is that in order to properly assess supply network risk, some attention should be given to workplace morale, as it will likely impact performance and weigh on the supply network. If performance is affected by a low morale, the supply network will experience hiccups or setbacks and the total cost of not having addressed morale issues early on will explode to be quite damaging to the bottom line. For that reason, it is evident that in order to properly manage supply chain focused manufacturing planning, the firm must have an adequate risk management tool in place like that conceived by Harland et al. (2003) but just with the added dimension of examining worker morale and its impact on performance.

Conclusion

Purchasing and supply chain management is one of the most important factors in a firm’s success. If done well, it will help the firm to keep costs down and the bottom line going up. If done poorly, it opens the firm to innumerable risks—from lost time on the production line to consumer flight to financial ruin. Supply managers must be cognizant of the overall goal of the company and what the company aims to do and be with customers. Just as Audi and Dell sought to have a special relationship with customers that would allow them to custom order products, a company that seeks this type of relationship with consumers will want to have a similarly close relationship with suppliers. However, it is always going to be most important to manage risk, to negotiate wisely and even to consider if outsourcing supply management is not the best option for a company that is…